CRS and FATCA expert

Hey FFI Agreement, what’s new?

Peter Cotorceanu FATCA, FFI Agreement

As set forth in the last blog, the deadline for the renewal of FATCA FFI Agreements is pending and all affected FIs must submit their renewal application by the end of July or risk removal from the FATCA GIIN List. (Remember, though, that not all FIs with GIINs have to renew—check the last blog for details.) While the offer to renew has the whiff of Corleone about it (i.e., one that no FI can refuse), Responsible Officers (ROs) ought to familiarise themselves with the modifications to the FFI Agreement before renewing their contracts with the IRS. Fortunately, there are not many material changes, few that impact fiduciaries, and none that ought to lead an RO to wake up with a horse’s head in his or her FATCA bed!

Many of the changes reflect revisions to the chapter 3 (Qualified Intermediary (QI)) and chapter 4 (FATCA) regulations released in late December 2016. The significant ones are listed below in order of perceived relevance to the fiduciary industry. As you’ll see, most of them are highly technical. The important point is not to get bogged down in the weeds, but at least to know what’s changed (to the extent any of this is really comprehensible as a practical matter!)

  • Clarification in Section 3.04(c) and the preamble that Reporting Model 2 FIs must treat Passive NFFE account holders as Non-Participating FFIs (NPFFIs) (and withhold accordingly) where the Passive NFFEs neither list their US Controlling Persons nor certify that they have none.
    • Annex I of the IGAs ends in a cul-de-sac with no clear outlet for entities that properly certify their Passive NFFE entity statuses while neglecting the Controlling Person component of the certification, leaving room for interpretation. The FFI Agreement now explicitly mandates treatment as NPFFIs.
    • The same provisions additionally affirms that Reporting Model 2 FIs may not use the documentation rules from Annex II of their IGAs (e.g., determining the entity’s classification based on publicly available information) in order to classify entity payees that are not account holders.
    • The IRS closed out this section with an unveiled threat that Reporting Model 2 FIs overly reliant on the presumption rules “may be determined to be significantly non-compliant with the requirements of an applicable IGA.”
      • Although provisions in the FFI Agreement are not directly applicable to Model 1 IGA FIs, the view of the IRS on the matter is now plain and the implications for Model 1 FIs presumably resemble those for their Model 2 kin.
    • The implication of the above points will tend to affect fiduciaries administering entities holding financial assets in Model 2 IGA (and perhaps Model 1 IGA) jurisdictions, where some FIs may now seek further certifications regarding FATCA status or Controlling Persons, if the FI’s initial due diligence procedures appear lax in retrospect.
  • Deletion of the reference to a Model 1 IGA Trustee-Documented Trust (TDT) amongst the potential reporting obligations of a Participating FFI (PFFI) trustee.
    • As noted in the preamble, the deletion acknowledges that reporting by such Model 1 IGA TDTs is outside the scope of the FFI Agreement, which governs the compliance activities of Model 2 and non-IGA FIs.
    • Practically speaking, this deletion has scant effect, but confirms relief for ROs of trustees documenting TDTs in Model 1 IGA jurisdictions from certifying the reporting of such TDTs’ account holders.
  • Clarification per Section 6.02(B) that account holder payment reporting by PFFI partnerships covers gross amounts made or credited to the interest holders and creditors of the partnership, including any full or partial redemption payments.
  • Adjustment of RO certification deadlines throughout Section 8 in alignment with the deferrals announced in 2016.
  • Addition of so-called “survival obligations” following termination of an FFI Agreement (by either the FI or the IRS), requiring the erstwhile FI to:
    • Complete all relevant compliance duties (e.g., account holder reporting) related to the calendar year of the termination per Section 12.03(c); and
    • Submit a final periodic RO certification covering the period up until the date of termination per Section 12.10.
  • Allowance for an FI to assume the full year’s FATCA account holder and Form 1042-S reporting for accounts acquired through merger or bulk acquisition within a reporting period per Sections 6.02(B)(2) and 6.05(F) and thus to relieve the previous FI of any reporting with respect to those accounts and/or payments.
    • In theory, this provision would apply to trustees assuming the trusteeship of TDTs through merger with or acquisition of the former trustee, permitting them to submit a combined FATCA account holder report for that year as the accounts of a TDT are formally reported as if they were the accounts of the trustee.
  • Deletion of multiple references to transitional rules and deadlines (e.g., pre-existing account holder due diligence), the compliance timelines for which have since elapsed.

As mentioned at the outset, many of these changes are hyper-technical. The bottom line is that, if you are an FI that must renew the FFI agreement (see the previous blog), you better do so by the 31 July deadline, now less than two weeks away. If you fully understand all of the above and the other provisions of the FFI agreement, well, that’s gravy.